BA profits take off, despite pension deficit and fuel costs

British Airways unveiled a 21 per cent jump in annual profits to £620m yesterday as fuel surcharges, a rise in premium passengers and a return to the black in Europe all helped boost the airline's performance.

The rise in profits lifted BA's operating margin to 8.3 per cent for the year and the chief executive Willie Walsh said he remained confident of hitting his 10 per cent target by 2008 with the aid of the airline's latest £450m cost-cutting plan.

BA shares climbed 7 per cent as dealers reacted to the better-than-expected figures and the airline's announcement that it now expected revenues for the current year to rise by 5-6 per cent compared with its previous estimate of 3-4 per cent.

The airline's pension fund deficit also ballooned by a further £101m to £2.1bn, while fuel costs this year are now expected to be £600m higher at £2.2bn. Net debt fell by £1.3bn to £1.6bn.

Mr Walsh said the fuel surcharge, which now stands at £70 for a long-haul return trip, was only offsetting part of the increased fuel bill. A bigger factor in last year's 10 per cent rise in revenues to £8.5bn was the increase in average fares as more passengers chose to fly business class.

BA's unions have rejected proposals announced in March to tackle the pension deficit by raising retirement ages and capping benefits. But Mr Walsh gave no hint that a better offer would be put on the table when he next meets the unions in June.

The unions have threatened to ballot members on industrial action unless there is an improvement but Mr Walsh said he was sure BA could avoid a repeat of the strikes that have brought its operations at Heathrow to a standstill for the past three summers. The rise in profits triggered a £48m staff bonus to be shared out among BA's 46,000 staff but the company is still prevented from restoring its dividend until the pensions deficit has been addressed.

A decision on the replacement of BA's long-haul fleet will also have to wait, for the same reason. BA is evaluating the Airbus A350 and A380 superjumbo, and Boeing's 787 Dreamliner and the 747-800.

BA's short-haul European network reported a £7m profit. Yields were up by 1.3 per cent, while passenger traffic grew by 3.7 per cent.